Lebras Farms Ltd. v. R., [1999] 4 CTC 2607, 99 DTC 983

Beaubier T.C.J.:

This appeal pursuant to the General Procedure was heard at Prince Albert, Saskatchewan, on August 10, 1999. Terrence Lebras of Arborfield, Saskatchewan, an officer of the Appellant, testified on its behalf and the Appellant also called David Cook, President of Farm World Equipment Ltd. of Kinistino, Saskatchewan and Dennis Ulmer, C.A., who is the current accountant of the Appellant. The Respondent did not lead any evidence.

Paragraphs 8 to 10 inclusive of the Reply to the Notice of Appeal read: 8. By Notices of Reassessment dated June 5, 1997, for its 1994 and 1995 taxation years, the Minister reassessed the Appellant’s returns as follows:

a) In respect of its 1994 taxation year, the Minister, inter alia:

1) Disallowed an Investment Tax Credit in the amount of $3,138.00 on property or expenditures having a capital cost of $191,000.00;

11) Revised the Appellant’s 1994 Capital Cost Allowance Schedule

by disallowing, in relation to the Farm Machinery, cost of additions in the amount of $191,000.00 (subsequently allowed in the Appellant’s 1994 taxation year), resulting in a recapture of depreciation in the amount of $8,832.00 as set out in the attached Schedule “A”;

111) Assessed arrears interest pursuant to subsection 161(1) of the Income Tax Act (the “Act”) in the amount of $3748.78; and

iv) Assessed installment interest pursuant to subsection 161(2) of the Act in the amount of $51.66; and

v) Assessed refund interest pursuant to subsection 160.1(1) of the Act on a refund to which the Appellant was not entitled in the amount of $95.56.

b) In respect of the Appellant’s 1995 taxation year, the Minister:

i) Disallowed a carry-forward of an Investment Tax Credit claimed in the Appellant’s 1994 taxation year in the amount of $15,962.00;

ii) Revised the Appellant’s 1995 Capital Cost Allowance Schedule by including cost of additions in the amount of $191,000.00 previously claimed in the Appellant’s 1994 taxation year;

iii) Assessed arrears interest pursuant to subsection 161(1) of the Act, in the amount of $2,674.91;

iv) Assessed installment interest pursuant to subsection 161(2) of the Act, in the amount of $276.10;

v) Assessed refund interest pursuant to subsection 106.1(1) of the Act on a refund to which the Appellant was not entitled in the amount of $154.94.

9. In so reassessing the Appellant, the Minister made the following assumptions of fact:

a) The facts admitted above;

b) The Appellant is a corporation incorporated pursuant to the laws of the Province of Saskatchewan and is engaged in a farming operation;

C) The Appellant’s taxation year ends on July 31st;

d) Terrence Lebras and Mart Lebras are directors, shareholders and authorized representatives of the Appellant;

e) On December 22, 1993, Terrence Lebras and Mart Lebras, entered into a “Contract for the Sale of a New Farm Implement — Form A” (the “Contract”) with Farm World for the purchase of the Farm Machinery;

f) The delivery date was not specified on the Contract;

g) Farm World is a dealership handling new and used farm equipment in the Province of Saskatchewan:

h) Farm World was informed on December 12, 1993 by the manufacturer, Ford New Holland, that the Combine would be available for delivery after March 15, 1994;

1) Prior to March 15, 1994 the Farm Machinery was to be used for display at a London trade show and for dealer training in Las Vegas;

j) After the Combine was finished being used as a display model it was updated and redesignated as a 1994 model;

k) The final stage of the manufacture of the Combine was completed on May 26, 1994;

l) The Combine was shipped to Farm World on May 26, 1994;

m) The date of delivery of the Combine to the Appellant was August 9, 1994;

n) The retail date for warranty purposes was recorded by the manufacturer as August 9, 1994;

o) The Swathmaster was ordered by Farm World on January 12, 1994;

p) The Swathmaster was shipped to Farm World on April 4, 1994;

q) The manufacturer recorded the date of sale of the Swathmaster for war- ranty purposes as April, 1994:

r) The Header was shipped to Farm World on June 2, 1994;

s) As part of the consideration for the sale, the Appellant traded in various farm equipment including a 1990 New Holland TR96 Combine which was received by Farm World on June 21, 1994 and a 1986 John Deere 7721 combine which was received by Farm World on April 26, 1994 (the “Trade-ins”);

t) The balance owing under the Contract was $17,500.00:

u) In the 1993 taxation year, the Appellant did not acquire, obtain title to nor have all of the incidents of ownership such as possession, use and risk of the Farm Machinery;

v) The Farm Machinery was not in existence, produced, nor in a deliverable state as at December 31st, 1993;

w) The Combine had been used or acquired for use for another purpose prior to being acquired by the Appellant;

x) In reporting income for its 1994 taxation year the Appellant:

i) claimed Investment Tax Credits in the amount of $19,100.00 to which it was not entitled; and

ii) claimed a deduction for Capital Cost Allowance in respect of the Farm Machinery to which it was not entitled.

B. Issues to be Decided

10. The issues are:

a) Whether the Appellant was entitled to claim an Investment Tax Credit of $19,100.00 in its 1994 taxation year in respect of the Farm Machinery;

i) Whether the Farm Machinery was acquired after December 2, 1992 and before 1994;

11) Whether the combine had been used or acquired for use for another purpose prior to being acquired by the Appellant;

b) Whether the Appellant was entitled to claim a deduction for Capital Cost Allowance in respect of the Farm Machinery in its 1994 taxation year;

C) Whether the Appellant disposed of the Trade-ins in its 1994 taxation year; and

d) Whether the Minister properly assessed interest pursuant to subsections 160.1(1), 161(1), 161(2) of the Act, for the 1994 and 1995 taxation years.

Paragraphs I to 5 inclusive, 7 to 17 inclusive and paragraph 19 of a Notice to Admit were admitted by the Appellant. They read:

1. On December 22, 1993, Terrence and Mart Lebras, on behalf of the Appellant, entered into a “Contract for the Sale of a New Farm Implement — Form A” (the “Contract”), which is Document #1 in this Request to Admit, with Farm World Equipment Ltd. (“Farm World”) for the purchase of a Model TR97 Ford New Holland Combine (the “Combine”), serial number 554584; a New Holland Model 971 Header (the “Header”), serial number 571809; and a 14 foot swathmaster (the “Swathmaster”) (collectively the “Farm Machinery”).

2. The delivery date was not specified on the Contract.

3. The combine was designated by Farm World as unit number N 1905.

4. Farm World was informed on December 13, 1993 by the manufacturer, Ford New Holland (“Ford”), that the combine would be available for delivery after March 15, 1994 and that prior to that date it was to be used at “London show and Las Vegas dealer training”. The fax note from Ford evidencing the availability date is document #2 in this Request to Admit.

5. After the Combine was finished being used as a display model it was updated and redesignated as a 1994 model.

7. The Combine was shipped to Farm World on May 26, 1994 as evidenced by the Ford computer printout which is Document #3 and the Invoice/pay-off Advice which is document #4 in this Request to Admit.

8. The invoice amount for the Farm Machinery was billed by Ford to Ford Credit on June 30, 1994. The Invoice/Pay-off Advice evidencing such billing is Document #4 in this Request to Admit.

9. The date of delivery of the combine to the Appellant was August 9, 1994.

10. The retail date for warranty purposes was recorded by the manufacturer as August 9, 1994 as evidenced by document #3 in this Request to Admit.

11. The Header was shipped to Farm World on June 2, 1994 as evidenced by the Invoice/Pay-off Advice, which is document #5 in this Request to Admit.

12. The Header was designated by Farm World as unit number N1961 as evidenced by Contract #003044, which is document #6 in this Request to Admit.

13. The Header was delivered to the Appellant on June 21, 1994 as evidenced by document #6 in this Request to Admit.

14. The Swathmaster was ordered by Farm World on January 12, 1994 as evidenced by the Order Entry, which is document #7 in this Request to Admit.

15. The Swathmaster was designated by Farm World as unit number $1960.

16. The Swathmaster was shipped to Farm World on April 4, 1994 as evidenced by invoice #998 which is document #8 in this Request to Admit.

17. The manufacturer recorded the date of sale of the Swathmaster for warranty purposes as April, 1994 as evidenced by the Rake-up Warranty Registration which is document #9 in this Request to Admit.

19. The balance owing under the contract was $17,500.00.

Assumptions 9(b), (c), (d), (e), (f) and (g) are correct. Assumptions (h) and (i) were not refuted and, except for the exact dates, they were confirmed by the evidence. Assumption (j) is an overstatement: on the evidence the “change” was merely to affix decals indicating that the combine was a 97 model. Contrary to assumption (k), on the evidence there was no further “manufacture” to the combine after its original production was completed prior to November 11, 1993. Assumption (1) is correct. Assumption (m) was not rebutted. Assumption (n) is correct and was explained by Mr. Cook who stated that Farm World tries to give its customers a full season warranty including pre-season coverage in the second season, which always causes quarrels with the manufacturers. The Court accepts this as true and as constituting a true description of responsible dealer practices where possible. Mr. Cook’s testimony that the Swathmaster was ordered on December 29, 1993 is accepted; the evidence that it was manufactured by Precision Metal Manufacturing of Rosetown, Saskatchewan before December 25 1993 is accepted as true. Assumptions (p) and (q) are correct. Assumption (r) was not refuted.

Assumption (r) respecting the Header is correct (Exhibit R-1, Tab 5).

Assumption (s) was not refuted, but the Court accepts Mr. Lebras’ testimony that the trade-ins were available for Farm World to pick up and sell “whenever”. In confirmation of this, the evidence is that the Appellant paid the cash portion of the sale on December 22, 1993 and made sure that it had the serial number for the TR97 it purchased at the time it signed the Form A Contract under the Saskatchewan Agricultural Implements Act on December 22, 1993. Farm World received the trade-ins well before delivering the new TR97 554584 Ford-New Holland combine to the Appellant. The Appellant also deleted the trade-ins from its insurance coverage and added TR97, Serial #554584 to its insurance on December 22, 1993. There was no delivery date specified in the Form A Contract, but both parties understood that the new combine had to be delivered to the Appellant by August 15, 1994 when it would commence its combine season. This occurred and until then the Appellant had no use for it.

Thus, assumption (t) is incorrect; after December 22, 1993 nothing was owed by the Appellant on the contract.

In these circumstances, the first question to be dealt with is whether the Appellant acquired Combine TR97- Serial #554584 before January 1, 1994. This contract in Form A was an unconditional contract for the sale of the combine in a deliverable state. On the evidence, the only change to the combine after Form A was signed was affixing decals indicating “97”. Thus, property in the combine passed at the date that the parties signed Form A. The combine is severable from the header and the Swathmaster. The header’s serial # is also in Form A and, on the evidence it was completely manufactured before January 1, 1994; as a result Form A constitutes an unconditional contract for the sale of the header in a deliverable state. Property in the header passed at the date that the parties signed Form A.

The Swathmaster is an attachment to the combine and the header. It was manufactured by a different manufacturer than the combine and header. It is also a form of attachment that is commonly known in the farming industry to be affixed to a combine for specific and different uses as distinct from, for example, a reel or a corn harvesting attachment. It is also sold for separate and known prices. For these reasons, the Court finds the contract for sale of the Swathmaster to be severable from the remainder of the Form A Contract before the Court in the amount of the listed retail price of a Swathmaster on December 22, 1993.

The Swathmaster which the Appellant acquired was not identified to the Form A Contract between the Appellant and Farm World before 1994, with the result that it was not acquired by the Appellant within the meaning of subsection 127(9) and the Sale of Goods Act of Saskatchewan. (Anderson Ventures Inc. v. Jarvie Farm Equipment (1976) Ltd. (1987), 60 Sask. R. 34 (Sask. Q.B.).)

The combine and the header were not “...used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer...” in the words of subsection 127(9). There are two reasons for this:

1. The combine and header were acquired by the Appellant on December 22, 1993 before anyone used them for anything,

and

2. David Cook testified that “dealer training” at Las Vegas consisted of a combine rising from below floor level under spot lights with dancing showgirls surrounding it. Neither this nor a more formal “dealer training” makes the combine used in the sense of subsection 127(9). Putting the combine and possibly the header, on display at dealership shows conducted by the manufacturer does not constitute use or make them used. Their sole use is to combine grain in farm fields where the profits of farming are earned. If they are shown in showrooms (“displayed”), or shown for dealer training, they are not used or even in use for the purposes of farming operations which is their market. Indeed, if showroom display constituted “used” in the sense of subsection 127(9), any new vehicle, goods or property put on display or shown for training by a manufacturer or retailer before sale would be “used”. That cannot be the meaning contained in subsection 127(9). (See London and Eastern Counties Loan Co. v. Creasy, [1897] 1 Q.B. 768)

Because Form A was a complete contract on December 22, 1993 when it was executed,

(a) The Appellant is entitled to claim an Investment Tax Credit in its 1994 taxation year in respect to the value of New Holland combine, Model TR97 — Serial #554584 and header model 971 — Serial #571809, (but not for the Swathmaster) in its 1994 taxation year.

(i) The combine and header were acquired after December 2, 1992 and before 1994. The Swathmaster having been manufactured by a different manufacturer, shipped separately to Farm World for attachment to the New Holland combine and header and not having been identified to the Appellant’s Contract until delivery, was acquired upon delivery on August 9, 1994.

(ii) The combine, header and Swathmaster had not been used or acquired for use for another purpose prior to being acquired by the Appellant.

(b) The Appellant is entitled to claim a deduction for capital cost allowance for the combine and the header in its 1994 taxation year.

(c) The Appellant disposed of its trade-ins in its 1994 taxation year.

(d) The Court has no discretion respecting the assessment of interest and it follows the result of the assessments as determined by this Court.

This matter is referred to the Minister for reconsideration and reassessment in accordance with these reasons.

The Appellant is awarded its party and party costs.

Appeal allowed in part.